AT&T Has $10 Billion Pension Charge, Sees Margin Pressure

AT&T Inc. (T), the largest U.S. phone
company, recorded a $10 billion fourth-quarter charge for its
pension plan and said smartphone discounts and costs related to
Superstorm Sandy cut into profit.

The Dallas-based company said in a filing yesterday that it
lowered its expected long-term rate of return on the pension to
7.75 percent, citing “continued uncertainty” for the stock
market and the U.S. economy.

AT&T, slated to report its full-year earnings after the
bell on Jan. 24, said it sold about 10.2 million smartphones
last quarter. The high subsidies it doles out on these devices
squeezed profit in the period, the company said. Sandy and other
storms also hurt earnings, primarily in the wireless segment,
lowering fourth-quarter operating income by about $175 million.

“The company has deep pension problems -- they are not
funding the pension enough,” said Laurence Balter, chief
investment strategist at Oracle Investment Research in Fox
Island, Washington. “They spend a lot of money on building out,
on competing against Verizon, and they need to focus on the
balance sheet.”

The shares rose 0.7 percent to $33.44 at the close in New
York. The stock climbed 11 percent last year.

‘Refined’ Costs

At Dec. 31, AT&T reduced its assumed discount rate for the
pension to 4.3 percent, resulting in an actuarial loss of about
$12 billion, it said. That was offset in part by about $1.9
billion from an asset gain and $100 million from other gains and
actuarial assumptions.

The company also said it “refined” the allocation of its
costs of providing services among its segments. While that
didn’t affect its consolidated results, it changed the landline
and wireless segments and it has made adjustments
retrospectively to the segment information from previous
periods.

While smartphones require subsidies to encourage consumer
purchases, gaining customers for the devices is key to AT&T’s
strategy because they use more data -- and therefore have higher
bills -- than subscribers who buy regular phones.

The company has been seeking to bounce back from the third
quarter, when it added just 151,000 contract subscribers. That
compared with 1.5 million net additions at AT&T’s biggest rival,
Verizon Wireless.